The purpose of this blog is to provide analytical commentary on formal and informal labour organisations and their attempts to resist ever more brutal forms of exploitation in today’s neo-liberal, global capitalism.

Friday, 21 September 2012

Crisis in the Eurozone, Part I – the fundamental unevenness between core and periphery!

With their book Crisis in
the Eurozone (Verso, 2012) Costas Lapavitsas and his colleagues have
accomplished an impressive assessment of the underlying dynamics of the
Eurozone crisis as well as provided an insightful analysis of potential ways
forward. In this post, the first part of a two-part review of the book, I will
focus on their discussions of the underlying dynamics.

In popular analyses, efficient German production is often contrasted
with alleged financial imprudence, corruption and laziness in Europe’s
periphery. Importantly, this volume does away with myths of cultural
superiority of this type. It establishes clearly that we cannot analyse the
German political economy and the peripheral political economies independently
from each other. Rather, it is the uneven way of how they have become
integrated into the political economy of the Eurozone, which is at the heart of
the problem.

The institutional
bias of the Eurozone

As Lapavitsas et al correctly note, the current problems of the Eurozone
as well as the particular policy course of how to overcome it go right back to
the establishment of Economic and Monetary Union (EMU) and the single currency as
outlined in the Treaty of Maastricht in 1991. With states giving up their right
to a sovereign monetary policy, now to be conducted by an independent European
Central Bank (ECB), and their fiscal policy sovereignty severely constrained through
the Stability and Growth Pact, the only way of regaining lost competitiveness
in the Eurozone has been downward pressure on wages and work related conditions
(PP.3-4). ‘The eurozone has directed the pressures of economic adjustment to
the labour market: competitiveness in the internal market would depend on
productivity growth and labour costs in each country, while labour mobility
would be in practice relatively limited. As a result, a “race to the bottom”
for wages and conditions has emerged in the eurozone benefiting large
industrial capital’ (P.158).

Equally, the emphasis on austerity policies was entrenched by EMU. In
order to be eligible to join the single currency, countries had to adjust to
the so-called convergence criteria. Most importantly, they had to aim at
national debt levels of no more than 60 per cent of GDP and budget deficits of
no more than 3 per cent of GDP. In practice, this implied austerity programmes
and cuts to public sector spending across the European Union (EU) already
throughout the 1990s in the run up to the implementation of EMU in 1999.

As Lapavitsas and his co-authors make clear, the introduction of the
single currency was not only intended to facilitate trade within the Internal
Market of the EU. The main emphasis was also on establishing the Euro as world
money. ‘The institutional and policy framework of the eurozone have not arisen
merely due to ideological dominance of neo-liberal thinking within the EU. They
have also been dictated by the need to sustain the euro in its role as world
money within and outside the eurozone’ (P.29). As a result, peripheral
countries had to join the euro at high exchange rates so that low inflation
levels were ensured from the beginning, allowing the Euro in turn to compete
internationally with the US Dollar. This implied pressure on the
competitiveness of peripheral countries such as Greece and Portugal from the
very beginning.

The eruption of the sovereign debt crisis

When the huge global financial services firm Lehman Brothers declared
bankruptcy on 15 September 2008, it had become clear that the financial crisis
had exceeded the worst expectations. What initially had started as a subprime
mortgage crisis in the USA quickly spread through the global financial markets
around the world. At great costs, states in industrialized countries including
EU members shored up the private banking systems and injected money into the
economy more generally to stem off recession. ‘The sudden rise of public debt
across the eurozone in the last couple of years has been purely the result of
the crisis of 2007-9’ (P.40). In turn, however, with liquid finance becoming
scarce on the global financial markets, especially peripheral Eurozone
countries have found it increasingly difficult to re-finance their debts. Ever
higher interest rates had to be offered to the financial markets in order to
sell the necessary state bonds.

As Crisis in the Eurozone,
however, makes clear, the global financial crisis only triggered the sovereign
debt crisis in Europe. The real cause of the crisis are the underlying
imbalances in the European political economy between the core around Germany
and the peripheral countries, exacerbated by the institutional bias of the
Eurozone, outline above. The vast majority of German exports go to the EU and
here Eurozone members, resulting in large account surpluses (see also The
Imposition of Austerity). In order to re-invest these profits, they have ‘been
recycled through foreign direct investment and German bank lending to
peripheral countries and beyond’ (P.2). Peripheral countries, on the other
hand, have been unable to compete with German productivity levels and ended up
as countries with large account deficits. ‘Confronted with the stagnant and
export-oriented performance of the dominant country of the eurozone, peripheral
countries have adopted a variety of approaches. Thus, Spain and Ireland have
had investment booms that were based heavily on real estate speculation and
bubbles. Greece and Portugal, meanwhile, have relied on high consumption,
driven by household debt’ (P.21). In the long run, such strategies based on
capital inflows were unsustainable and it is this reality, which was brought to
the fore by the global financial market crisis.

German workers as the victims of export success

It would, however, be wrong to conclude that German workers benefited
from the export success (see also German
workers and the Eurozone crisis). German productivity increases have not
been the result of new technology and innovative working practices. Rather,
they resulted from significant downward pressure on wages and working related
conditions in line with the institutional bias of EMU. ‘Germany has been
unrelenting in squeezing its own workers throughout this period. During the
last two decades, the most powerful economy of the eurozone has produced the
lowest increases in nominal labour costs, while its workers have systematically
lost share of output. EMU has been an ordeal for German workers’ (P.4). In
other words, Germany was more successful than other Eurozone countries in
cutting back labour costs. ‘The euro is a “beggar-thy-neighbour” policy for
Germany, on condition that it beggars its own workers first’ (P.30).

Who is being rescued? Banks, not people!

We are asked to believe that financial support packages for Greece and
other peripheral countries are to help the country to avoid bankruptcies. In
the end, however, it is not the Greek health service or the Greek education
system, it is foreign banks heavily exposed to peripheral debt, which are the
target. Especially French and German banks, having recycled super profits from
export success, are in danger should peripheral countries default on their
obligations. As Lapavitsas et al assert ‘although the rhetoric of European
leaders was about saving the European Monetary Union by rescuing peripheral
countries, the underlying aim was to deal with the parlous state of the banks
of the core’(P.108).

This makes also clear that despite what the popular media want us to
believe, the Eurozone crisis is not a crisis between Germany on the one hand,
and peripheral countries on the other. Rather, it is capital, which has gained
in strength vis-à-vis workers, who are made to pay for the crisis whether they
find themselves in the core or periphery of the European political economy.
This implies that we cannot only look at the structural dynamics underling the
Eurozone crisis, but also need to focus on the agency behind first EMU, and
then the current drive towards ever tougher austerity programmes in countries
such as Greece. The establishment of EMU and the related institutionalisation of
neo-liberal economics in Europe were from the very beginning in the interests
of capital and here in particular transnational European capital, as it allowed
employers to play off workers from one country against workers from another
country. As the institutional bias of EMU put systematic downward pressure on
wages across the Eurozone, trade unions were weakened and put on the defensive.

At the time, the vast majority of European trade unions were unhappy about EMU
and its implications. Many attempted to resist its imposition, but were
ultimately unsuccessful. Against the background of globalisation and the
increasing transnationalisation of European production structures, capital had
gained increasing structural power vis-à-vis trade unions, which were still
predominantly organised at the national level (see Bieler
2006). Current austerity policies are simply a continuation of policies,
which had always been part and parcel of EMU. Then and now, austerity policies
‘have aimed at protecting the interests of banks and bondholders by preventing
default as well as protecting the interests of industrial capital by changing
the balance of power against labour’ (P.181). It is ultimately the interests of
capital, which are served at the expense of labour. The exploitation of workers
in the core and periphery alike has been intensified as a result of the crisis.

Nevertheless, workers are not only victims. They have also weapons, with
which to resist capital exploitation and to work towards an alternative way out
of the crisis. The second part of the review of Crisis in the Eurozone will deal with this theme.